Mexico, December 17, 2010 -- Moody's de Mexico has assigned a rating of Aa3.mx (Mexico National
Scale Rating) to the State of Guerrero's upcoming MXN 500 million
Municipal Lending Program. Moody's Investors Service has assigned
a rating of Ba1 (Global Scale, Local Currency) to this program.
Within this program, Banorte, the lender, will grant
individual loans to municipalities, which will be paid by a trust
(Invex as trustee) that will receive Participation General Fund and Municipal
Promotion Fund federal transfers from the Federal Treasury (TESOFE).
The State of Guerrero is the originator of the municipal trust.
Municipalities that access the lending program will sign individual loan
agreements with Banorte and adhere to the trust agreement. The
loans will pay an interest rate composed of the 28-day Mexican
Interbank Interest Rate (TIIE in Spanish) plus a spread according to the
rating of the program and the maximum maturity will coincide with the
end of the municipal administrations.
The assigned ratings are based on documentation received by Moody's as
of the rating assignment date. While individual loan contracts
within the program will be signed during the life of the program by the
municipalities, Moody's does not expect changes to the program structure
over this period. In the event that the program structure changes
from the documentation submitted to us, Moody's will assess the
impact that these differences may have on the ratings and act accordingly.
The Ba1/Aa3.mx ratings assigned to the lending program reflect
the underlying creditworthiness of the State of Guerrero (Ba2/A2.mx,
positive outlook) supported by the following legal and credit enhancements:
1.- Trust structure and the irrevocable instruction to TESOFE
reduce the probability of a municipality or the State successfully interfering
with the flow of funds.
2.- Estimated cash flows generate moderate debt service
coverage ratios. Under a Moody's base case scenario,
cash flows for the loan are projected to provide 1.6x debt service
coverage at the lowest point over the life of the loan. Under a
stress case scenario, estimated cash flows for the loan are projected
to provide 1.4x debt service coverage, at the lowest point
over the life of the loan.
3.- Solid level of reserve funds that represent 2x coverage
of debt service that provides a cushion against payment delays.
4.- Political risks at the level of individual municipalities
are reduced by short maturities of loans, with repayments scheduled
before the end of current municipal administrations.
5.- Through an Irrevocable Instruction from the State of
Guerrero to its Master Trust, after paying the state's debt
service obligations it must transfer up to 20% of the total outstanding
municipal loans if an event of early amortization on one or more loans
The rating rationale also recognizes the following credit negatives:
1.- If the State's debt service payable through the Master
Trust increases, remaining cash flows will be reduced. These
cash flows may potentially be less than the 20% of the total outstanding
municipal loans that should be transferred to the Municipal Trust in an
event of early amortization, limiting the structure's enhancement
provided by this mechanism.
2.- The complex structure of program, under which
the Municipal Trustee handles a potentially large number of accounts,
poses operational risks. These risks are offset by a positive historic
track record of the trustee in operating complex structures (same trustee
as the original program).
3.- Under the terms of the municipal loan contracts,
the non-respect of certain contractual obligations, including
the provision of timely financial information, grants the lender
the right to call an early amortization of individual loans. While
this consideration provides a mechanism by which the credit culture of
individual municipalities may influence the performance of the program,
related risks are offset, partially, by a state credit committee
that screens and monitors the finances of participants in the program.
The principal methodologies used in this rating were Regional and Local
Governments Outside the US published in May 2008, and The Application
of Joint Default Analysis to Regional and Local Governments published
in December 2008.
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".mx"
for Mexico. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Implementation Guidance
published in August 2010 entitled "Mapping Moody's National Scale
Ratings to Global Scale Ratings."
The last rating action with respect to the State of Guerrero was taken
on September 14 2010, when Moody's changed the outlook on
the State of Guerrero's Ba2/A2.mx issuer ratings outlook
to positive from stable.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Adrian Javie Garza
Asst Vice President - Analyst
Moody's de Mexico S.A. de C.V
MD - Sub-Sovereigns
Moody's Investors Service Ltd.
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Moody's de Mexico S.A. de C.V
Moody's Assigns Ratings of Ba1 and Aa3.mx to the State of Guerrero's Upcoming MXN 500 million Municipal Lending Program
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